United States Steel Corporation (X), Walter Energy, Inc. (WLT): Insiders Are Buying These 2 Stocks Heavily…Should You?

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Following large, recent insider buying is a fun way to screen for stocks. It’s not scientific, and shouldn’t be a central investment thesis, but it can be a very bullish sign. In fact, many studies have shown that stocks of companies with heavy insider buying go on to outperform the market by as much as 7%.

I’ve combed through stocks with large, recent insider purchases. Here are two that I think could have a “bull” behind the buying. To be safe, I’ve included the bear case as well for you to consider.

United States Steel Corporation (NYSE:X)

The Buy

United States Steel CorporationMurry Gerber, a board member at United States Steel Corporation (NYSE:X), has been buying shares heavily over the past month. Mr. Gerber followed a quarter million dollar purchase with a $1.36 million purchase just weeks later. Clearly, to be buying now, Mr. Gerber must feel that a turnaround is in store for the steel maker, as shares have struggled mightily in recent years.

The Bad

Like many stocks United States Steel Corporation (NYSE:X) fell hard in 2008, falling from $184 a share to about $21 a share. Unlike almost all stocks the steel maker has fallen even further from its 2009 lows, as it trades near $18 today. High operating costs, cyclical factors (steel prices, etc.), and labor union woes have led to hard times for U.S. Steel; the company actually expects to report a loss of $1.07 this year. But it’s not just the steel industry that is to blame, Nucor Corporation (NYSE:NUE) has been profitable through the tough years and actually expects to report (modest) growth this year. With Nucor trading near a 52 week high, United States Steel Corporation (NYSE:X) is clearly showing itself to be a laggard in this industry.

The Bull

The bullish case for United States Steel Corporation (NYSE:X) lies on two catalysts, a rebound in steel and the company shoring up some of its operational woes. Mr. Gerber’s buy comes at an interesting time — the company has been in labor battles, seen its costs rise and nearly every analyst has turned against it. At the same time, while U.S. Steel is publicly saying the industry won’t return to full strength until 2015, most analysts expect a steel rebound next year.

A steel rebound would lift all boats, but if you want the best of breed, Nucor Corporation (NYSE:NUE) is the pick. Nucor is expected to raise earnings from $1.85 this year, to a whopping $3.63 next year and it also pays a 3.21% dividend yield. But, while Nucor is a great company, it’s hard to think it could rally hard from here. Even if it earns $3.63 next year (which would be phenomenal growth) at a current price of $45, it looks fairly valued.

Which is why Gerber’s buy has me so interested. U.S. Steel is projected to make $1.53 next year, and $2.40 the year after. The big question is, can U.S. Steel keep the ship steady until the rebound in steel comes?

It’s no guarantee but if this company can just stay solvent, the chances are that Gerber will end up being early. Just make sure that you’re ready for a high-risk, high-reward scenario before you jump in with him.

Walter Energy, Inc. (NYSE:WLT)

The Buy

In recent weeks, five high-level directors at Walter Energy, Inc. (NYSE:WLT) have snagged up over 80,000 shares in this metallurgical coal producer. The heavy buying has made Walter one of the most heavily bought stocks amongst insiders in recent months.

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